1. It is believed in some quarters that the legal problems arising from State contract2 arbitration have been laid to rest. The legal rules established by arbitration 'case law'3 (especially in cases conducted under the auspices of the ICC International Court of Arbitration4), by some State legislatures5 and courts, 6 and by the practices of the ICC Court7 are said to have finally resolved the difficulties inherent in State contract arbitration.[Page80:]

2. Nonetheless, international arbitration involving State parties is still a subject of debate. 8 This is at least in part due to the growing importance of ICSID arbitration9 and the many arbitration proceedings initiated by foreign private investors against the State of Argentina. 10 There is, however, another deeper reason for this continuing debate: the ingrained political passions that pit the liberal-minded against the partisans of state control.

3. In State contracts and the arbitrations arising from them, this polarity is reflected in the tension between the private interest of the foreign private-law company, i.e. the profit-making inherent in any commercial activity, and the public interest that State parties, sovereign States and offshoots of States are supposed to protect. 11

4. In theory, the concept of 'public interest' should coincide with that of the 'common good' or the well-being of the population in the State's keeping. However, the public interest is often invoked by State parties in arbitrations as a means of avoiding the international obligations resulting from the State contract. For instance, in a recent ICC arbitration, a State had found itself unable to generate sufficient electricity to cover the needs of its population, owing to a lack of rain. It had therefore entered into a contract with a foreign private company for the construction of a thermoelectric plant to make up for the shortfall in power. The completion of the power plant coincided with the arrival of rain and a change of government. The new government ordered the State electricity authority to cancel the contract, alleging (i) that it had become aware of acts of bribery committed by the former government when making the contract, and (ii) that it would be contrary to the public interest to perform the contract, as this would deprive it of funds that could be used for building schools and hospitals. This illustration shows that the public interest is sometimes invoked by State parties in international arbitrations, not for noble purposes, but to conceal the political avatars of a change of government or bad contract management by a government body.

5. We have examined arbitral awards rendered between 1990 and 2003 in ICC arbitrations involving State parties, as well as a number of recent decisions and awards in ICSID cases. In each instance there was a clash between the private interest and the public interest, regardless of whether or not the latter was used for demagogical purposes. A distinction may be drawn between those cases which we would call 'normal arbitrations' and those which we would call 'pathological arbitrations'.

6. Normal arbitrations are those in which the State party involved takes part in the arbitration proceedings in good faith and does not use unfair means of resistance. It is important to stress that an increasing number of the cases involving State parties filed with the ICC Court belong to this category, and in such cases the State party increasingly acts as claimant and comes out as the winner.

7. Pathological arbitrations involving State parties are those in which the State party resists the normal conduct of the arbitration and, if need be, uses unfair means to do so. Given that pathological arbitrations are more interesting from a legal point of view than normal arbitrations, we shall confine our analysis here to the former. In these cases, the confrontation between the private interest and the public interest is reflected in different and contrasting strategies and the attempt by the arbitrators to find, as far as possible, a happy medium. 12 In the words of the German philosopher Hegel, 13 it could be said that this confrontation leads to a dialectic between a thesis [Page81:] (the State party's strategy of 'nationalizing' the State contract and the resulting arbitration), an antithesis (the foreign private-law company's strategy of 'internationalizing' the State contract and the resulting arbitration) and a synthesis (the decision by the arbitrators and some State courts to 'moderately internationalize' the State contract and the resulting arbitration). 14

8. All three - thesis, antithesis and synthesis - are rooted in a sociological premise which is at the same time one of the fundamental premises of legal sociology: ubi societas ibi ius.15 We believe that one could equally say ubi ius ibi societas, as a legal system necessarily implies the existence of a society whose internal relations it regulates. If a dispute arising from a State contract calls for the application of a law, it logically follows that this law must be, or be part of, the legal system that governs relationships within a society. The question is what is that society?

9. The answer varies according to the thesis (I), antithesis (II) and synthesis (III) and has important consequences as far as the applicable law in State contract arbitrations is concerned.

I. Thesis: nationalization of State contracts and resulting arbitrations

10. State parties in pathological arbitrations take the line that the legal relationship established between a private party and a State party in a State contract is part of the society of the State in question. In the language of international investment law, the host State for this relationship and any resulting arbitration is that of the State where the investment is made. Accordingly, the law applicable to the State contract can only be that of the State involved and any dispute arising from the contract must be decided by the courts of that State. The State party reasons as follows: the private party has come to make money in our country and to take advantage of our lack of modern technology in order (for example) to build a motorway, and must therefore submit to the law and the courts of our State.

11. This view is often accompanied by a reference to the philosopher Jean Bodin16 and the concept of sovereignty: by submitting to a foreign law and to international arbitrators, a State would be undermining its sovereignty.

12. The nationalization of State contracts relies on a medley of more or less legal techniques (A) and leads to a number of consequences (B), all of which deserve to be described and commented upon.

A. Techniques used to nationalize State contracts and resulting arbitrations

13. State parties in pathological arbitrations use two techniques of a legal kind to nationalize State contracts.

14. Firstly, some States17 lay down as a condition for international public contracts (i) that the foreign private law company create a subsidiary company, having the same [Page82:] nationality as the State party, through which to act in the State in question and sign the State contract, or (ii) that the contract be subject to the law and the courts of the State in question. The reason for this is that if the State contract is between two parties of the same nationality or established in the same State, the State party can assert that any dispute arising from the contract cannot legally be submitted to international arbitration. Hence, the State party can claim that an arbitration clause inserted in the State contract is invalid or that the private party cannot be regarded as a private investor under the provisions of any applicable bilateral investment treaty (BIT).

15. Secondly, once a dispute has arisen, State parties in pathological arbitrations claim that the contract in question is a domestic one and that therefore any disputes arising therefrom cannot be submitted to international arbitration. Reference is often made to the localization of the project within the territory of the State involved in order to stress the domestic nature of the legal relationship. Adopting a formal definition of the international character of an arbitration, akin to that of Article 1(3) of the 1985 UNCITRAL Model Law on International Commercial Arbitration, 18 the State party points out, for instance, that both parties were established within the same State when they entered into the State contract containing the arbitration clause. 19

16. In short, State parties in pathological arbitrations endeavour to show that the parties to the underlying contract and the resulting arbitration share the same nationality or are based in the same State and that the dispute must consequently be settled in the courts of the State where the investment is made and in accordance with its law. These aims anticipate their consequences, which are fourfold.

B. Consequences of nationalizing State contracts and resulting arbitrations

(i) Rejection of international arbitration

17. The nationalization of State contracts leads to the rejection of both international arbitration as a dispute resolution mechanism and the rules of international arbitration law. This rejection, which is often based on jurisdictional immunity, is expressed in four different ways.

18. Firstly, some State parties in pathological cases decide purely and simply not to take part in the arbitral proceedings at all. They refuse to reply to the arbitration request, do not appear at hearings and, in general, fail to state their position with respect to the matter at issue in the arbitration. It might be thought that their failure to participate is due to a lack of resources, but it is often a stratagem. Indeed, as such parties have seizable property and assets only in their home country, they hope that by not taking part in the arbitration they will cause the contract and related arbitration to be nationalized and that the domestic court which will have jurisdiction as a result will be reluctant to order the seizure of their property and assets in favour of a foreign private-law company. In such conditions, the private investor will, in our view, have no choice but to call into play any guarantees and insurance that may have been taken out when the State contract was signed.

19. Secondly, when State parties do take part in the proceedings, they decide to obstruct normal progress by objecting to the jurisdiction of the arbitrators. The [Page83:] means they use to do so vary from one case to another and concern the existence, validity and scope of the arbitration agreement.

20. As far as objections to the existence of an agreement to arbitrate are concerned, State parties in pathological cases claim that the official of the State or State offshoot that signed the contract containing the arbitration clause was not authorized to legally bind the entity the official represented, either because the official was not one of the persons designated by law as having such authorization20 or had not previously obtained the necessary authorization to commit the State or its offshoot to an international arbitration agreement. The State parties thereby attempt to show that no formal agreement on international arbitration was reached between the State party and the private company. It should be noted that in doing so the State parties always rely on their domestic law.

21. Objections relating to the validity of the arbitration agreement are based on the subjective arbitrability of the dispute. 21 The State parties sign an international arbitration agreement and then, once a dispute has arisen, raise arguments drawn from their domestic law to assert that the dispute cannot be submitted to arbitration. Five more or less classic arguments have been found: (1) The State party alleges that the political constitution embodying the fundamental and highest rules in its legal system22 does not allow it to submit the dispute in question to international arbitration. (2) The State party asserts that the contract made with the private company is characterized as an administrative contract under its domestic law and that, according to the administrative law of the State in question or a line of consistent court decisions within that State, disputes arising from an administrative contract cannot be submitted to international arbitration. 23 (3) It is alleged that the origin of the dispute lies not in the contract but in a governmental act over which the administrative courts of the State have sole jurisdiction. (4) The State party claims that only those offshoots of the State that are listed in a statute (for instance relating to public procurement) can refer their disputes to arbitration and that it is not included in the list. (5) The submission of disputes involving State parties to arbitration is claimed to be contrary to public policy.

22. Objections relating to the scope of the arbitration agreement concern either the persons bound by the arbitration agreement (ratione personae) or the subject matter of the disputes to be submitted to arbitration (ratione materiae).

23. Three arguments are raised in support of an objection to the ratione personae scope of the arbitration agreement. (1) If the private company that has signed a contract with an offshoot of the State tries to bring the State itself into the arbitral proceedings, the State objects on the grounds that since it did not sign the contract containing the arbitration clause no such extension of its effects is possible. (2) The State contract is transferred from the State or an offshoot of the State to another State entity as a result of internal government restructuring; the State entity to which the contract is transferred claims that it cannot be a party to the arbitration as it did not sign the State contract containing the arbitration clause. (3) In the context of a BIT, the respondent State alleges that the claimant does not legally qualify as an investor or that it cannot be considered to be a national of the other State party to the BIT. 24 In an ICC case based on a BIT between two European Union States, the BIT requires that the private investor acting as claimant should not be resident in the State where the investment is made; the parties in this case disagree over the definition of residence.[Page84:]

24. The ratione materiae scope of the arbitration agreement has been challenged in the awards examined only in the context of investment arbitrations based on a BIT. In most of the ICSID cases25 and in the four ICC cases based on a BIT, the respondent State objected to the jurisdiction of the arbitrators on the grounds that the economic transaction undertaken by the private company did not legally qualify as an investment.

25. When, for what may be regarded as political reasons, failure to participate or objections to arbitral jurisdiction prove to be insufficient, State parties to pathological arbitrations turn to their own courts for an anti-suit injunction or anti-arbitration injunction preventing the arbitral proceedings from continuing. 26 Flouting the principle of Kompetenz-Kompetenz, the court is requested to order a stay in the arbitration proceedings pending its final ruling on the existence, validity and/or scope of the arbitration agreement. In two ICC arbitrations, the State parties have obtained anti-arbitration injunctions. In one case, 27 the seat of the arbitration is not located in the State that is host to the investment, while in the other case28 it is. The second case would in theory appear to be more problematic than the first.

26. Lastly, at the end of the arbitral proceedings, having arranged for the seat of the arbitration to be in their own State, some State parties bring an action to set aside the award in the relevant court in their home State. This happened in ICC case 10346, where the award made against the State party was set aside by the relevant court for a reason other than the limited grounds for setting aside an arbitral award laid down in most arbitration laws in the world29 and, furthermore, not raised by any of the parties.

27. The first consequence of nationalizing State contracts and resulting arbitrations, which involves calling for the application of domestic law and the sole jurisdiction of national courts, leads logically to the second, which is to reject the application of international law to the merits of the dispute.

(ii) Rejection of international law

28. International law includes, amongst others, two essential principles: the autonomy of contracting parties and pacta sunt servanda. In State contracts these principles are quite often expressed in two types of clauses: one specifying the applicable law chosen by the parties and the other a stabilization clause30 relating to the law of the State party to the contract. In the ICC cases examined, the State parties refuse the application of international law to the merits of the dispute by claiming that the applicable law clause and the clause stabilizing the law of the State involved chosen by the parties are null and void. The cancellation of the latter clause allows the respondent State to change the contractual relationship between itself and the foreign private company by making legal rules to protect its own interests.

29. The rejection of anything that appears to be international in the State contract leads State parties in pathological arbitrations also to object to the application of principles of international law and lex mercatoria and, beyond the arbitration proceedings strictly speaking, to resist enforcement of an award contrary to their interests.

(iii) Sovereign State's immunity from execution

30. If the rejection of international arbitration and of the application of international law to the resolution of the dispute is insufficient to ensure an arbitral award in their [Page85:] favour, State parties try to prevent the award from being enforced against them. 31 To this end, they sometimes invoke not only the rules of their domestic law but also, paradoxically, those of foreign laws and international conventions establishing a sovereign State's immunity from execution. Given the present state of the law relating to immunities, 32 this third arm of the strategy to nationalize State contracts and the arbitrations arising therefrom appears to be the most effective, as State entities take advantage of imprecise provisions to protect their own property and assets against enforcement of arbitral awards.

31. As a last resort, when all legal arguments for objecting to the international nature of a legal relationship have been exhausted, State parties in pathological arbitrations rely on arguments drawn from outside the legal field.

(iv) Use of media

32. The media are ideal instruments for demagoguery and State parties use them to win the support of public opinion and to exert pressure on the arbitrators, counsel, experts and judges involved in settling a dispute. A statement such as 'if the State performs the arbitral award, it will be impossible to build 42 schools and 12 hospitals' well illustrates the dangers of using the media during or after arbitral proceedings.

33. Strangely, private companies have responded to the use of the media by imitating such use. Thus, we have come across statements such as 'if the State does not perform the award, no foreign investor will ever invest in this country in the future'. However, when it comes to techniques of a legal kind, private companies adopt a strategy diametrically opposed to that of State parties by seeking to internationalize State contracts and the arbitrations to which they give rise.

II. Antithesis: internationalization of State contracts and resulting arbitrations

34. This strategy is based on the premise that the host society for the legal relationship established between the foreign private undertaking and the State party, and any dispute arising from that relationship, is the world society. Hence, the law applicable to the State contract must be international (merchant) law and, in the absence of an international (commercial) court, any dispute relating to the contract must be decided by international arbitrators. The foreign company does not consider that it has gone to the host State but rather that the host State has turned to the international (merchant) community in search of the technology, goods and capital it needs for a project essential to the development of its country and the wellbeing of its population. In so doing, the State abandons the governmental attributes33 for which it is recognized at national level and assumes those of any international trader. 34

35. The internationalization of State contracts again relies on legal techniques (A) and leads to consequences (B) that are worth describing and commenting upon. [Page86:]

A. Techniques used to internationalize State contracts and resulting arbitrations

36. Private foreign companies use three legal techniques to internationalize State contracts and resulting arbitrations.

37. Firstly, they reject the formal definition of the international nature of the legal relationship and the arbitration and define them instead in economic terms following the example of French law. 35 According to the economic definition, the movement of goods, services or capital across the borders of two or more States qualifies as an international transaction even if the parties involved are formally nationals of the same State or were established in the same State when the arbitration agreement was signed.

38. Secondly, the seat of the arbitration has been used for the purpose of internationalization. In an ICC case, a foreign private company and a sovereign State had chosen the capital of the said State as the place of the arbitration. War subsequently broke out in that State and the private company asked for the seat to be changed due to the impossibility of holding meetings and hearings and the legal uncertainty caused by the war. One could suspect that the real reason for this request was the fear that the State at the seat would nationalize the arbitration, for instance by setting aside the award.

39. Lastly, ICSID arbitration offers examples of a third ingenious technique used to internationalize State contracts and resulting arbitrations. Private companies try to escape the obligations resulting from a dispute resolution clause with a national bias by invoking a BIT umbrella clause. 36 Such clauses require parties to abide by the provisions of the BIT, including any provision allowing the private investor to resort to international arbitration. This technique is perhaps best illustrated by the cases SGS v. Pakistan37 and SGS v. Philippines. 38 In the first case, the dispute resolution clause in the State contract provided for ad hoc arbitration under Pakistani arbitration law. In the second, the investment contract contained a jurisdiction clause in favour of the State courts of Manila. In both cases, the private investor took the view that referring its disputes with the States concerned to the bodies specified in the investment contracts was not neutral and, using the mechanism mentioned, tried to bring them before an ICSID international arbitral tribunal. 39

40. In short, private companies involved in pathological arbitrations attempt to show that the State contract and the dispute are international, that they belong to the international society, and that they should be settled by international arbitrators in accordance with international (merchant) law.

B. Consequences of internationalizing State contracts and resulting arbitrations

41. Leaving aside the use of the media, which has already been commented upon, 40 the strategy adopted by private parties in pathological arbitrations involving State parties has three main consequences.[Page87:]

(i) Reaffirmation of international arbitration

42. The private parties present international arbitration as the only neutral means of resolving the disputes arising from a State contract and reject the objections to the arbitrators' jurisdiction raised by the State parties. 41

43. As far as the objections relating to the lack of authorization of the person who negotiated and signed the contract on behalf of the State party are concerned, private parties rely on the theory of appearances and claim that they believed in good faith that the public official was empowered to act thus. 42 They also refer to the principle according to which a public law entity cannot invoke the provisions of its own national law in the international sphere in order to extricate itself from the obligations resulting from an international arbitration agreement.

44. Private parties also invoke good faith when refuting objections relating to the validity of the arbitration agreement (subjective arbitrability). They allege bad faith on the part of a State party which, after freely consenting to an international arbitration agreement, tries to get out of it by claiming that it is prevented by its national law (constitution, concept of administrative contract, concept of administrative act, public procurement rules, public policy) from entering into an arbitration agreement. They add that such conduct is contrary not only to good faith, which is a part of lex mercatoria and essential to any contractual relationship, but also to truly international public policy.

45. When it comes to the ratione personae scope of the arbitration agreement, the private party argues for the extension of the effects of the arbitration agreement as recognized in French law. 43 It claims that although the public law entity did not sign the contract, it actively participated in negotiating, making, performing and, possibly, terminating it. As regards the argument that the private party does not qualify as an investor, foreign private undertakings try to show that they were entitled to rely on the BIT44 and that they have made an investment within the meaning of the BIT.

46. These examples show that private parties in pathological arbitrations oppose the strategy adopted by their public counterparts by relying on international arbitration law, which constitutes the procedural rules of lex mercatoria. They also rely on international law when it comes to deciding on the merits and here use two different techniques depending on the basis of the arbitration.

(ii) Reaffirmation of international law

47. If the arbitration is based on a traditional arbitration agreement (for instance, an arbitration clause in a State contract), the private parties invoke party autonomy and pacta sunt servanda when defending the validity of the choice of law and stabilization clauses.

48. If the private party has tried to internationalize the legal relationship by way of an umbrella clause in a BIT, it could - at least in theory - avoid the application of the chosen national law and instead request that international law (BIT, principles of international law) be applied to decide the dispute. 45

49. The position taken by private parties with respect to the law applicable to the merits clearly shows that they consider - albeit implicitly - that the host society for a State contract is the international (merchant) society. Thus, even when they have [Page88:] chosen a national law as applicable to the contract, they try to internationalize it by using lex mercatoria and the UNIDROIT Principles of International Commercial Contracts (UNIDROIT Principles) to correct and fill any gaps in the legal solution derived from national law.

50. When the parties have not chosen the law applicable to the State contract, private parties usually ask the arbitral tribunal to apply lex mercatoria or the UNIDROIT Principles. 46

51. The internationalization of State contracts would remain incomplete if it did not also cover the immunity from execution to which State parties lay claim.

(iii) Rejection of the immunity from execution of sovereign States

52. Private parties regard it as nonsensical to allow a public law entity to take part in arbitration if any award rendered against it is unenforceable. They accordingly claim that the State party implicitly waives both jurisdictional immunity and immunity from execution when entering into an international arbitration agreement.

53. We have seen that the internationalization of a State contract and a resulting arbitration aims to respond directly to the nationalization strategy adopted by State parties. The private party's intention is to remove the legal relationship from the national sphere and to refer it to a neutral third party for a decision that will be made on the basis of similarly neutral rules of law. Reconciling the two strategies is a major challenge for arbitrators.

III. Synthesis: moderate internationalization by arbitrators and some national courts

54. The arbitral awards mentioned and certain judgments show that arbitrators and some State courts tend to internationalize the legal relationship between the parties with moderation. Even if they consider that the international (merchant) society is the host society for this relationship, they take the view that there may also be a need to apply certain national legal rules when deciding on disputes over the jurisdiction of the arbitrators and the merits in relation to State contracts. This approach can be seen both at the stage of defining the nature of the relationship (A) and when determining the legal consequences of the definition (B).

A. Defining the legal relationship as national or international

55. Whether a State contract is defined as national or international depends first and foremost on the basis of the arbitration.

56. If the arbitration is based on an arbitration agreement contained in a State contract, the law applicable to the characterization of the legal relationship and the arbitration will be that of the seat of the international arbitration, if no international convention is applicable. Where the law of the seat contains a formal definition of [Page89:] the international nature of an arbitration, international arbitrators may, if the parties both come from the same State, decide that the legal relationship is national and accordingly decline jurisdiction over the dispute. 47 If, on the other hand, the law of the seat contains an economic definition of the international nature of an arbitration, international arbitrators may, in the same circumstances, find that the legal relationship is international and that they therefore have jurisdiction over the merits. Such a decision was made in a recent ICC case, in which the seat was in Paris and the parties were nationals of the same Latin American State.

57. It may also be noted that the attempt to internationalize a legal relationship through the application of an umbrella clause in a BIT was moderated in the SGS v. Philippines case. While acknowledging the effectiveness of the umbrella clause, the tribunal gave priority to the dispute resolution clause in the investment contract on the grounds that generalia specialibus non derogant and that this clause fulfils the 'unless otherwise stated' of Article 26 of the Washington Convention48 and constitutes a pre-condition for any recourse to ICSID arbitration. If a dispute is referred to an ICSID tribunal before the procedure provided for in the investment contract has been completed or has proved to be of no avail, the ICSID proceedings should be stayed and the parties requested to follow the dispute resolution mechanism provided for in the investment contract.

B. Consequences of moderately internationalizing the legal relationship

(i) Moderate reaffirmation of international arbitration

58. As to whether or not the person who signed the State contract on behalf of the State was authorized to do so, international arbitrators distinguish between two situations. If the legal relationship is international, they systematically apply the theory of appearances and take jurisdiction. 49 If the legal relationship is national, they sometimes come to the conclusion that they do not have jurisdiction. In one international case in which the parties had expressly provided in their arbitration agreement that the State party should obtain parliamentary authorization before resorting to arbitration, the international arbitrators declined jurisdiction on the grounds that, since the State party had not obtained authorization, it would be contrary to the parties' intention to proceed with an international arbitration in such circumstances.

59. Whether or not the legal relationship is national or international also plays a decisive role in relation to the validity of the arbitration clause, i.e. subjective arbitrability. Although in most of the cases examined the arbitrators considered the legal relationship as international and thus, on grounds of good faith and truly international public policy, rejected the objections raised by the State parties on the basis of their national laws, in the three ICC telecommunications cases already mentioned the international arbitrators regarded the legal relationship as national and declined jurisdiction as the dispute arose out of an administrative act, over which, according to the law of the State in question, the administrative courts had sole jurisdiction.

60. In one ICC case the arbitral tribunal mentioned a very interesting moderation concerning the application of good faith and truly international public policy when [Page90:] State parties object to the arbitrators' jurisdiction on the basis of their national laws. The arbitral tribunal proposed in an obiter dictum that such an objection should be allowed only 'in cases where the violation of the State's domestic law is serious and obvious'.

61. It is also interesting to note that in several cases, although the arbitrators do not decide whether the legal relationship is domestic or international, they deal with the question of jurisdiction by distinguishing between an administrative contract and a private government contract or between jure imperii and jure gestionis acts. They take jurisdiction in most cases as they consider the contract in question to be a private government contract (jure gestionis). 50

62. The moderation international arbitrators apply to the scope of the arbitration agreement is less clear-cut. The law of the seat of the arbitration would appear to be relevant when extending the effects of the arbitration agreement to public-law entities that have not signed it. In a recent ICC case, an arbitral tribunal with its seat in Paris followed the Jaguar ruling by deciding to extend the effects of the arbitration agreement to a sovereign State that had not signed it. According to the tribunal, the State apparently took an active part in negotiating and performing the contract. In Switzerland, on the other hand, tribunals appear to be much more hesitant about applying the theory of implied consent to the arbitration agreement. 51 In any event, it would seem that international arbitrators are more cautious when it comes to extending the effects of an arbitration agreement to a non-signatory State party than in the case of a non-signatory private party. 52

63. When a State contract has been transferred as a result of restructuring amongst State offshoots, international arbitrators systematically analyse the problem in accordance with the domestic law of the State in question and thereby once again moderate the internationalization of the legal relationship.

64. As regards the concept of investor, international arbitrators in ICSID proceedings have barely reined in attempts to internationalize the legal relationship. However, it should be pointed out that the most extreme decisions that have interpreted the concept of investor very widely have been sharply criticized, 53 even if such an interpretation is consistent with most BITs. In order to restrict the meaning of investor in the future, international arbitrators could draw on the history of the negotiations leading to the Washington Convention. 54

65. This has already been the case for the meaning of investment. To begin with, international arbitrators tended to extend their jurisdiction ratione materiae in line with the broad definition of investment found in BITs. More recently, they have tried to narrow this definition by applying the meaning of investment as intended by States at the time of the Washington Convention. 55

66. It may be seen from the foregoing remarks that the jurisdiction of international arbitrators is moderated through the application not only of national but also international law. The same can be said of the legal rules applied by international arbitrators when deciding on the merits.

(ii) Moderate reaffirmation of the application of international law56

67. It is essential to distinguish here between those situations in which the parties have chosen the law applicable to the State contract and those in which they have not.[Page91:]

68. In the first case, international arbitrators systematically respect the parties' choice: pacta sunt servanda. Whenever the State party challenged the validity of an applicable law clause or a clause stabilizing the law of the State in question, the international arbitrators held that the clause was valid, as the legal relationship was of an international nature, and they accordingly ruled on the merits.

69. It may be noted that while international arbitrators always respect the parties' choice of national applicable law, they very often include in the reasons for the award arguments drawn from international law in support of the solution arrived at through the application of national law. Thus, international arbitrators sometimes add arguments taken from lex mercatoria and the UNIDROIT Principles57 and in some cases they have used Article 17(2) of the ICC Rules of Arbitration58 - particularly the concept of 'relevant trade usages' - for this purpose.

70. At a theoretical level, the question arises as to whether the application of a national law chosen by the parties in a State contract can be excluded in favour of the mandatory rules of international (merchant) law. The law chosen by the parties in a State contract may, in our view, be regarded as having a purely contractual value. This would mean that the provisions of the law are merely contractual clauses that could be excluded by international arbitrators if they were to be found contrary to the mandatory provisions of lex mercatoria - which, of course, presupposes that criteria can be found to identify the mandatory provisions of lex mercatoria.

71. When the parties have not chosen the law applicable to their State contract, international arbitrators clearly tend to choose legal rules of an international character when deciding on the merits, even if the State party calls for its own law to be applied. For this purpose they indifferently use the indirect59 or direct60 method of determining the applicable law: all roads lead to international law.

72. The application of the national law chosen by the parties and the international law which the arbitrators consider applicable is often moderated, in addition, through the application of certain public policy provisions in the law of the State involved and public international law relating to such matters as the succession of States, embargoes and force majeure.61

(iv) Implied waiver of a sovereign State's immunity from execution

73. In its decision of 6 July 2000 in Société Creighton v. Ministère des Finances de l'Etat du Qatar et a., the French Court of Cassation (1st civil chamber) held:

It is in violation of the principles of international law governing foreign State immunity and Article 24 of the Rules of Arbitration of the International Chamber of Commerce that, in order to lift attachments towards payment and conservatory attachments, the decision finds that the State in question cannot be deemed to have waived immunity from execution and that acceptance of an arbitration clause is no reason to presume that such immunity, as distinct from jurisdictional immunity, has been waived, whereas the undertaking made by the State in signing the arbitration clause to perform the award in accordance with Article 24 of the ICC Rules of Arbitration implied the State's waiver of its immunity from execution. 62

According to this decision, a public law entity that consents to an arbitration agreement referring to the 1988 ICC Rules of Arbitration is deemed, as a result of Article 24 of the Rules, 63 to have waived its immunity from execution.[Page92:]

74. The Court of Cassation's decision in Creighton is not a panacea, however, and its scope has been considerably moderated and restricted through the definition of the public property for which the foreign private company may seek an attachment order as part of the enforcement of an arbitral award against a public-law entity. For instance, the Paris Court of Appeal, in its judgment of 10 August 2000 in Ambassade de la Fédération de Russie en France et a. v. Compagnie Noga d'importation et d'exportation, 64 stated that the implicit waiver of immunity from execution affirmed by Creighton applied only to the property of a State or offshoot of a State that was not used for the purpose of a public service. Consequently, the question of a State's immunity from execution has shifted - at least in French law - to that of identifying what State property is used for the purpose of a public service. Could it not be considered that most, if not all, of the property belonging to a State or an offshoot of a State is directly or indirectly and sooner or later intended for a public service activity?

* * *

75. The dialectical method has the advantage of showing that thought and ideas are constantly evolving. Hegel says that each synthesis in turn becomes a new thesis. It is obvious that the synthesis proposed by international arbitrators and some national courts is more receptive to the strategy of internationalizing State contracts and the resulting arbitrations than to their nationalization. It is reasonable to expect that the number of arbitral awards rendered against State parties in pathological cases will increase. Will this give rise to a new antithesis, with State parties in pathological arbitrations putting up even fiercer resistance to the enforcement of any award rendered against them? The new synthesis will then have to be developed by State courts in supervisory or exequatur proceedings or proceedings for the compulsory enforcement of arbitral awards. 65 As we wait to see the tenor of this new synthesis, we can but observe that the dialectic of international arbitration involving State parties pursues its course.

1
The views expressed in this article are those of the author alone, who makes no claim whatsoever to be expressing the position of the ICC International Court of Arbitration or its Secretariat.The author thanks Adriana Cely, Ximena Herrera and Maria Leticia Ossa for having helped with the research required for this study, and Virginia Hamilton for her editorial assistance.

2
'State contract. A contract between a sovereign State and a private person. See Internationalization (3d meaning)' (G. Cornu, Vocabulaire juridique, 3d ed. (Paris: PUF, 2002) at 223). 'Internationalization. 3 Submission of a State contract to (public) international law for the purpose of withdrawing the contract from the domestic legal system of the State in question' (ibid. at 485). P. Mayer, 'La neutralisation du pouvoir normatif de l'Etat en matière de contrats d'Etat' (1986) 113 J.D.I. 5, distinguishes between a narrow and a broad meaning of State contract. The former covers contracts between a sovereign State and a foreign private company, whilst the latter covers contracts between a State offshoot and a foreign private company. In the present article, we adopt the broader of these two meanings. For a recent and highly recommended study on State contracts see Ch. Leben, 'La théorie du contrat d'Etat et l'évolution du droit international des investissements', Hague Academy of International Law, Collected Courses, vol. 302 (2003), pp. 197-386.

3
Inverted commas have been used here in light of a recent decision on arbitral jurisdiction in a case brought before the International Centre for Settlement of Investment Disputes (ICSID). In paragraph 97 of its decision the tribunal states as follows: 'This raises a question whether, nonetheless, the present Tribunal should defer to the answers given by the SGS v. Pakistan Tribunal. The ICSID Convention provides only that awards rendered under it are "binding on the parties" (Article 53(1)), a provision which might be regarded as directed to the res judicata effect of awards rather than their impact as precedents in later cases. In the Tribunal's view, although different tribunals constituted under the ICSID system should in general seek to act consistently with each other, in the end it must be for each tribunal to exercise its competence in accordance with the applicable law, which will by definition be different for each BIT and each Respondent State. Moreover there is no doctrine of precedent in international law, if by precedent is meant a rule of the binding effect of a single decision. There is no hierarchy of international tribunals, and even if there were, there is no good reason for allowing the first tribunal in time to resolve issues for all later tribunals. It must be initially for the control mechanisms provided for under the BIT and the ICSID Convention, and in the longer term for the development of a common legal opinion or jurisprudence constante, to resolve the difficult legal questions discussed by the SGS v. Pakistan Tribunal and also in the present decision.' ICSID case ARB/02/6, SGS Société Générale de Surveillance S.A. v. République des Philippines (hereafter SGS v. Philippines), Decision of the Tribunal on Objections to Jurisdiction, 29 January 2004, p. 37, available at <www.worldbank.org/icsid>.

4
See e.g. Y. Derains, 'Les tendances de la jurisprudence arbitrale internationale' (1993) 120 J.D.I. 829.

5
See e.g. Article 177(2) of the 1987 Swiss Private International Law Act ('If a party to an arbitration is a State or an enterprise or organization controlled by it, it cannot rely on its own law in order to contest its capacity to be party to an arbitration or the arbitrability of a dispute covered by the arbitration agreement.') and Article 2(2) of the 2003 Spanish Arbitration Act, which clearly follows the former ('If the arbitration is international and one of the parties is a State or company, organization or enterprise controlled by a State, such party may not invoke the prerogatives of its own law to avoid the enforceability of the arbitration agreement.'). On these provisions see R. Briner, 'Commentaire à l'article 177 de la Loi suisse de 1987 sur le droit international privé' in S.V. Berti et al., ed., International Arbitration in Switzerland - An Introduction and A Commentary on Articles 176-194 of the Swiss Private International Law Statute (Helbing & Lichtenhahn/Kluwer Law International, 2000) 317-326; F. Mantilla-Serrano, 'La nouvelle loi espagnole du 23 décembre 2003 sur l'arbitrage' [2004] Rev. arb. 225 at 246.

6
See e.g. the Paris Court of Appeal's decision of 17 December 1991 in Gatoil, [1993] Rev. arb. 281 (Annot. H. Synvet).

7
See E. Silva Romero, 'ICC Arbitration and State Contracts' (2002) 13:1 ICC ICArb. Bull. 34.

8
See e.g. the excellent conference on States in international economic disputes, organized by Ph. Leboulanger on 24 January 2003 under the auspices of the Comité français de l'arbitrage, [2003] Rev. arb. 613-1096.

9
See e.g. E. Gaillard, 'L'arbitrage sur le fondement des traités de protection des investissements' [2003] Rev. arb. 853.

10
As reported by A. Escobar in his paper entitled 'Argentina's Deluge of Investor-State Arbitration Proceedings' at the colloquium on new developments in transnational arbitration relating to international investment, organized by the Institut des Hautes Etudes Internationales, Paris II University, 3 May 2004.

11
See E. Silva Romero, supra note 7, §§ 3-8.

12
See e.g. Aristotle, Nichomachean Ethics, trans. W.D. Ross (Oxford: Clarendon, 1908) bk 5.

13
G.W.F. Hegel, Phenomenology of Spirit.

14
In several of the awards examined, the arbitral tribunal divides its consideration of each point at issue (especially those relating to jurisdiction) into 'Respondent's position', 'Claimant's position' and 'Arbitral Tribunal's decision'. This division corresponds exactly to the dialectic described above.

15
See e.g. J. Carbonnier, Sociologie juridique (Paris: PUF, 1994) p. 305ff.

16
J. Bodin, Les Six livres de la République, ed. G. Mairet (Paris: Le Livre de Poche, 1993).

17
This requirement is sometimes laid down in a law (as in the case of the Colombian oil company, Ecopetrol, for certain kinds of contract) and sometimes specified in the contract.

18
« An arbitration is international if: a) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their places of business in different States; or b) one of the following places is situated outside the State in which the parties have their places of business: i) the place of arbitration if determined in, or pursuant to, the arbitration agreement; ii) any place where a substantial part of the obligations of the commercial relationship is to be performed or the place with which the subject-matter of the dispute is most closely connected; or c) the parties have expressly agreed that the subject-matter of the arbitration agreement relates to more than one country.'

19
It is doubtless no coincidence that many developing States have adopted, in full or in part, the formal definition of the international character of an arbitration as proposed by UNCITRAL. Latin American examples include Chile, Colombia, Panama, Peru and Venezuela.

20
See e.g. ICC case 6474, hereafter pp. 102-106.

21
On subjective arbitrability see Fouchard Gaillard Goldman On International Commercial Arbitration (The Hague: Kluwer Law International, 1999) p. 313ff.; E. Silva-Romero, supra note 7, §§ 15-31.

22
This argument is often used by State parties from Latin America, where the constitution is given great importance, apparently due to the influence of the positivism of Hans Kelsen, as explained by Ph. Dunham in his paper 'Constitutional Law and Arbitration in Latin America', ICC Latin American Arbitration Day, Curitiba, Brazil, 17 September 2004.

23
See e.g. the decisions of the Lebanese Council of State in Etat libanais v. Société FTML (Cellis) SAL and Etat libanais v. Libancell SAL, [2001] Rev. arb 855 (Annot. Marie Sfeir-Slim & Hadi Slim). Conscious of the negative impact of these decisions on foreign investment, the Lebanese legislature amended seven articles of the Lebanese New Code of Civil Procedure by Law No. 440/2002 of 29 July 2002. On this law see N. Comair-Obeid, 'The Impact and Consequences of Changes in Lebanese Arbitration Law' (2003) 14:1 ICC ICArb. Bull. 47.

24
Recent decisions in ICSID cases offer several examples of such objections to arbitral jurisdiction. For commentary on those relating to the nationality of the investor see E. Gaillard, La jurisprudence du CIRDI (Paris: Pedone, 2004). Jurisdiction in ICSID arbitrations is generally regulated by Article 25 of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, signed in Washington on 18 March 1965 ('Washington Convention').

25
See E. Gaillard, ibid.

26
See E. Gaillard, 'Il est interdit d'interdire : réflexions sur l'utilisation des anti-suit injunctions dans l'arbitrage commercial international' [2004] Rev. arb. 47.

27
The famous Brazilian case Copel. See the first-instance judgment of 3 June 2003 by Josély Dittrich Ribas in Companhia Paranaense de Energia v. UEG Araucária Ltda and the decision of 26 June 2003 on the appeal made against this judgment, Court of Appeal of the State of Paraná (Des. Leonardo Lustosa, Relator). On 15 March 2004 a further decision was rendered by the Curitiba first-instance judge, Josély Dittrich Ribas, declaring the ICC arbitration clause in the State contract to be void.

28
The equally famous Argentine case Yaciretá. See the decision of 29 September 2004 by federal judge Claudia Rodríguez Vidal in Empresas reunidas Impregilo-Dumez y asociados para Yaciretá Unión transitoria de empresas - Eriday UTE y Entidad binacional Yaciretá. In this case, the main practical problem is that two of the three arbitrators reside in the town where the seat of the arbitration is located and could have criminal sanctions imposed upon them if the arbitral tribunal were to decide that the arbitral proceedings should continue, despite the anti-arbitration injunction issued by the State judge at the seat.

29
For criticism of this decision see F. Mantilla-Serrano, 'Termorío: un duro golpe al arbitraje' [2004] Revista Internacional de Arbitraje 191.

30
On stabilization clauses see e.g. A. Giardina, 'Clauses de stabilisation et clauses d'arbitrage : vers l'assouplissement de leur effet obligatoire ?' [2003] Rev. arb. 647.

31
On immunity from execution see e.g. F. Knoepfler, 'L'immunité d'exécution contre les Etats' [2003] Rev. arb. 1017.

32
See C. Annacker & R. Grieg, 'State Immunity and Arbitration' in this issue, pp. 70-78.

33
On the difference between Etat (State) and Administration (Government) see P. Mayer, supra note 2, pp. 8-14.

34
See Fouchard Gaillard Goldman on International Commercial Arbitration, supra note 21, pp. 42-43, §§ 73, 74.

35
See Article 1492 of the New Code of Civil Procedure ('Where international commercial interests are involved the arbitration shall be an international one.') and the commentary on this provision in the Dalloz Code, 2004 ed., p. 698 ('The international character of an arbitration shall be determined according to the economic reality of the process in connection with which it is implemented. In this respect, it is sufficient that the economic transaction transfers property, services or capital across borders; the nationality of the parties, the law applicable to the contract or the arbitration, and the place of the arbitration, on the other hand, have no effect.')

36
Rather than define an umbrella clause, we prefer simply to quote Article X(2) of the Switzerland/Philippines BIT referred to in SGS v. Philippines: 'Each Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party.'

37
ICSID case ARB/01/13, SGS Société Générale de Surveillance S.A. v. République islamique du Pakistan, Decision on Objections to Jurisdiction, 6 August 2003, (2003) 18 ICSID Rev. 290 (Annot. M. Polasek).

38
See supra note 3.

39
For a more detailed discussion of these cases, see A.S. El-Kosheri, 'Contractual Claims and Treaty Claims Within the ICSID Arbitration System', paper presented at the 2004 Annual Meeting of the ICC Institute of World Business Law [to be published]. See also Th.W. Wälde, 'The «Umbrella» (or Sanctity of Contract/Pacta Sunt Servanda) Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases', paper presented at the colloquium on new developments in transnational arbitration relating to international investment, organized by the Institut des Hautes Etudes Internationales, Paris II University, 3 May 2004 [to be published].

40
See §§ 32 and 33 above.

41
See §§ 17-27 above.

42
See e.g. ICC case 6474, hereafter pp. 102-106.

43
See e.g. the decision of the Paris Court of Appeal (1re Ch. D), 7 December 1994, Société V. 2000 ancien Jaguar France v. Société Project XJ 220 Ltd et autres, [1995] Rev. trim. droit com. 401 (Annot. Dubarry & Loquin).

44
See E. Gaillard, supra note 32.

45
On the basis of Article 3 of the Articles on State Responsibility: 'The characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law.' (See J. Crawford, The International Law Commission's Articles on State Responsibility, Introduction, Text and Commentaries (Cambridge: Cambridge University Press, 2002); or, in the context of an ICSID arbitration, Article 42 of the Washington Convention: 'The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.' (See E. Gaillard & Y. Banifatemi, 'The Meaning of "and" in Article 42(1), Second Sentence, of the Washington Convention: The Role of International Law in the ICSID Choice of Law Process' (2003) 18 ICSID Rev. 375.)

46
See e.g. ICC cases 7110 ((1999) 10:2 ICC ICArb. Bull. 39) and 9474 ((2001) 12:2 ICC ICArb. Bull. 60).

47
As happened in three ICC cases relating to telecommunications concessions.

48
'Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy.'

49
See e.g. ICC case 6474, hereafter pp. 102-106.

50
On the characterization of a State contract, see Ph. Leboulanger, 'Some Issues in ICC Awards Relating to State Contracts' in this issue, p. 93 at 96ff.

51
See J.-F. Poudret & S. Besson, Droit compare de l'arbitrage international (Bruylant/LGDJ/Schulthess, 2002) at 233ff.

52
See e.g. ICC case 8035, J.J. Arnaldez, Y. Derains & D. Hascher, Collection of ICC Arbitration Awards 1996-2000 (Kluwer Law International/ICC Publishing, 2003) 455; (1997) 124 J.D.I. 1040.

53
See E. Gaillard, supra note 32.

54
To this end see C.H. Schreuer, The ICSID Convention: A Commentary (Cambridge: Cambridge University Press, 2001) p. 121ff.

55
See e.g. ICSID case ARB/03/11, Joy Mining Machinery Limited v. Arab Republic of Egypt, Award on Jurisdiction, 6 August 2004, p. 14, <www.asil.org/ilib/JoyMining_Egypt.pdf>.

56
See J. Crawford & A. Sinclair, 'The UNIDROIT Principles and their Application to State Contracts' (2002) Special Supplement ICC ICArb. Bull. 57.

57
See e.g. ICC case 7365, hereafter pp. 108-109.

58
'In all cases the Arbitral Tribunal shall take account of the provisions of the contract and the relevant trade usages.'

59
Article 13(3) of the 1988 ICC Rules of Arbitration: 'The parties shall be free to determine the law to be applied by the arbitrator to the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict which he deems appropriate.'

60
Article 17(1) of the 1998 ICC Rules of Arbitration: 'The parties shall be free to agree upon the rules of law to be applied by the Arbitral Tribunal to the merits of the dispute. In the absence of any such agreement, the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate.'

61
On force majeure see Ph. Leboulanger, 'Some Issues in ICC Awards Relating to State Contracts' in this issue, p. 93 at 98ff.

62
[2001] Rev. arb. 114 (Annot. Ph. Leboulanger).

63
'1. The arbitral award shall be final. 2. By submitting the dispute to arbitration by the International Chamber of Commerce, the parties shall be deemed to have undertaken to carry out the resulting award without delay and to have waived their right to any form of appeal insofar as such waiver can validly be made.' The 1998 ICC Rules of Arbitration currently in force contain a similar provision in Article 28(6): 'Every Award shall be binding on the parties. By submitting the dispute to arbitration under these Rules, the parties undertake to carry out any Award without delay and shall be deemed to have waived their right to any form of recourse insofar as such waiver can validly be made.'

64
[2001] Rev. arb. 114.

65
Compulsory enforcement applies even to ICSID awards under Article 54(1) of the Washington Convention: 'Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.'